PCS Edventures!, Inc. 10-K

Item 1. Business. History and Organization PCS Edventures!, Inc., an Idaho corporation (“PCS,” the “Company,” “we,” “our,” “us,” and words of similar import), was originated under the laws of the State of Idaho on August 3, 1994 as “PCS Education Systems, Inc.” On March 27, 2000, we changed our name from “PCS Education Systems, Inc.” to “PCS Edventures!.com, Inc.” On August 31, 2015, we changed our name from “PCS Edventures!.com, Inc.” to “PCS Edventures!, Inc.” PCS Edventures!, Inc. is our current company name. On February 18, 2016, we announced the completion of an asset purchase of Thrust-UAV, a privately-held company focused on drone technology. On March 27, 2017, the Company filed a Form 15-12g with the Securities and Exchange Commission (the “Commission”) whereby, under Rule 12g-4(a)(1) and Rule 12h-3 (b)(1)(i), it terminated its duty to file reports with the Commission. Effective December 31, 2017, the Company’s Executive Vice President, Director, and highest-ranking operations officer, resigned to pursue other interests. Given his tenure at the Company of over 20 years and his position at the time of his departure, this effectively caused a change in executive leadership at the Company. On January 1, 2018, Michael J. Bledsoe, then Vice President and Treasurer, and a Director, was appointed to assume responsibility for the operational oversight of the Company. On April 23, 2018, he was promoted to President, a position he currently holds. Todd R. Hackett was Chairman of the Board and CEO at the time of this transition and remains in those positions with the Company. The Company’s Board of Directors determined that it was in the best interests of the shareholders of the Company to register its common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and return to its former status as a “fully-reporting” entity with the Commission given the Company’s improved financial condition and management’s desire to improve the Company’s reporting quality to shareholders. Accordingly, the Company filed a Form 10 Registration Statement with the Commission on October 3, 2023, which became effective December 4, 2023 (the “Form 10 Registration Statement”). 3 Overview The Company specializes in creating experiential, hands-on, K12 STEM (Science, Technology, Engineering, and Math) education products and curriculum. “STEM” is often abbreviated as STEAM – Science, Technology, Engineering, Arts, and Math – to include the arts. We use the terms STEM and STEAM interchangeably throughout this Annual Report and make no significant distinction between the two terms. Through our acquisition of Thrust-UAV, we developed educational drones and drone curriculum. Our customers include schools and school districts from the collegiate to kindergarten level, and providers of out-of-school programming, which include after-school programs, military education programs, home-schooling programs, summer programs, and corporate outreach programs. We sell predominately in the United States and sell into nearly every state in the nation. We have a few international customers, but revenue from customers outside of the United States is not material, and we do not focus our sales efforts on international markets at this time. Our products facilitate STEM education by providing engaging activities that demonstrate STEM concepts and inspire further STEM studies, with the goal of ultimately leading students to pursue STEM career pathways. Due to our exceptionally detailed curriculum, our products are easy to teach and do not require a teaching degree or experience to administer. PCS’ educational products are developed from both in-house efforts and contracted services. They are marketed through reseller channels, direct sales efforts, partner networks, and web-based channels. Products PCS has developed and sells a variety of STEM education products into the K12 market, which can be categorized as follows: 1. Enrichment Programs These camps are for the informal learning market and are designed to be highly engaging for students while easily administered by the instructor. The Company offers approximately 30 different enrichment programs and typically develops at least two new programs each year. Some of the more popular programs include Ready, Set, Drone!; Traveling Artist; Unleash Your Wild Side, Build a Better World; Claymation; Oceanic Exploration; Pirate; and Flight and Aerodynamics. 2. Discover Series Products These products are designed for the makerspace environment and include engaging STEM activities that motivate students to pursue educational pathways toward STEM careers. The Discover Series includes Discover Engineering; Discover Robotics & Physics; Discover Robotics & Programming; and Discover STEM. 3. BrickLAB Products These products are designed for the grade school market and use the Company’s proprietary bricks (which are Lego compatible) and curriculum to engage students to explore, imagine, and create within a STEM education framework. The Company offers a variety of grade-specific BrickLAB products. 4. Discover Drones, Add-on Drone Packages, and Ala Carte Drone Items These products are designed around using drones as a platform for STEM education and career exploration. These titles include the Discover Drones series of Products; Discover Drones Indoor Coding Bundle; Discover Drones Indoor Racing Add-On; Discover Drones Outdoor Practice Add-on ; and all the spare parts and ala carte drone items offered in the Company’s comprehensive drone packages. 4 5. STEAMventures BUILD Activity Book These series of activity books are designed for the K-3 market and ideal for a distance-learning environment. The series includes 12 different issues. Instructor guides and/or family engagement guides are included. The Company also provides the necessary bricks for the builds in the activity books as a separate, but related product. 6. Professional Development Training The Company offers professional development trainings, for a fee, to educators who are implementing the Company’s products in their classroom. The Company intends to continue developing STEM education products that address demand from large markets. Distribution Methods of Products The Company sells its products directly to customers and through resellers. The Company kits all of its products at its Boise, Idaho facility and ships the products directly to customers. Resellers do not inventory the Company’s products and the Company “drop ships” its products directly to the resellers’ customers. Trainings and Professional Development sessions are conducted either at the Company’s facilities or at the customer’s location, depending on the desires of the customer. Customers can buy from the Company’s website, from a reseller’s website, or by presenting the Company with a valid purchase order. Competition The STEM education market is not well defined and is very fragmented. Our products experience competition from multiple angles. Most schoolteachers with exposure to STEM can create their own lesson plans, using their own materials, to emulate the educational benefits of using the Company’s products, at a fraction of the cost. The value proposition of our products is less compelling in a budget-constrained environment, as cost becomes an overriding factor in many such cases. Additionally, there are several sources of free and inexpensive curriculum that teachers can use to help them deliver STEM educational concepts similar to those experienced by the users of our products. In addition to competition at the local level, many of our products face competition from similar products produced by multinational companies that have significant advantages over us in terms of financial resources, human resources, brand loyalty, supply-chain costs, and global reach. While many of these companies primarily target the toy industry, their sheer size and cost advantages allow them to easily breach the education market with their products. In this regard, the company competes directly with Lego, DJI, Fischertechnik, K’Nex (acquired by Basic Fun), and Vex IQ, among many others. There are numerous companies of various sizes that develop and sell STEM educational products. While there may be several characteristics that differentiate our Company’s products from theirs, all of us are competing for a finite market. There are several potential solutions to STEM education demand and, oftentimes, companies can achieve a first-mover advantage by developing a relationship with a customer or distributor, and integrating their suite of products and services into the supply chain before we can showcase our offerings. We also compete against non-profit organizations, such as Project Lead The Way, who have a mission to promote and implement STEM education. The programs they provide can be free, subsidized, government-sponsored, rigorously developed, and/or heavily promoted, creating intense competition for our products and services. We believe that we have a competitive advantage in curriculum development. We employ STEM teachers who, through experience, understand the environment that educators operate within and the unique challenges they face, and we develop our curriculum with the educator in mind for an easy, successful, and consistent implementation. Many of our competitors’ products focus on the product or the student, with the educator left to figure out the details of implementation. 5 Manufacturing, Supplies, and Quality Control Our Enrichment Programs contain several types of materials, kitted in a box. There is no manufacturing involved in the creation of our final product in the Enrichment Program category. Nearly all materials used are non-proprietary and commercially available. The materials are mostly consumer discretionary (paper, crayons, pencils, tape, yarn, etc.) and sourced from a variety of vendors, some of which are located outside of the United States. Some of our Enrichment Programs contain proprietary products from other companies, commercially available, and the Company maintains close relationships with these suppliers. The final creation of the product via kitting and packaging is done at our corporate facility in Boise, Idaho. The printing and digitizing of the curriculum, as well as all curriculum development oversight, is performed at our corporate facility. Our Discover series of products contains some proprietary products designed by our Company and manufactured abroad as well as non-proprietary, commercially available products. Most of our Discover series of products are comprised of other companies’ final products, combined with our curriculum. Our RubiQ education drone is a proprietary product of the Company and is the main component in Discover Drones. The RubiQ education drone’s components are manufactured abroad and quality-controlled at our corporate facility. The final packaging of all Discover products is done at our Boise, Idaho facility. The printing and digitizing of the curriculum, as well as all curriculum development oversight, is performed at our corporate facility. Our BrickLAB products contain proprietary plastic building bricks (that are Lego compatible) manufactured for us by a long-time vendor with manufacturing facilities in South Korea. The printing and digitizing of the curriculum, as well as all curriculum development oversight, is performed at our corporate facility. The STEAMventures BUILD Activity Book was developed at our corporate facility. The printing of the product and final packaging are performed at our corporate facility. Sources and Availability of Raw Materials and Names of Principal Suppliers Raw material procurement has become more challenging since the Covid-19 pandemic. Backlogs have created availability problems for a few items, shipping congestion from time to time has significantly delayed shipment of many items, and prices of nearly all items have increased materially. We expect continued inflation in the materials we use in our final products, although we expect transportation costs to moderate. With few exceptions, we can generally source materials from multiple vendors, although the pricing from different vendors varies considerably. Thus, supply problems that we experience generally do not impair our business from functioning. However, supply problems that cause us to procure from higher-priced sources negatively affect our gross margin as we cannot adjust our prices as quickly as the prices of our raw materials increase. In response this challenging environment, we raised 2022 prices for many products to maintain our margin goals, and we were compelled to do so again in 2023. Additionally, we buy in bulk to achieve better pricing, and have increased general inventory levels. While we purchase from numerous vendors, below are our most used vendors by dollar volume: Mida’s Global Fischertechnik Amazon ASI Flash Hobby Technology FPVElite Dependence on One or a Few Major Customers During Fiscal Year 2024, we had four major customers who each accounted for at least 5% of sales and who, when aggregated, accounted for 37.4% of sales. One of these customers was a relatively new contract from the Air Force JROTC program and represented 13.7% of our revenue in Fiscal Year 2024. The details of sales from our major customers are below: Customer Designation FY 2024 FY 2023 FY 2022 Relationship Duration Customer A 5.0 % 5.2 % 8.3 % 10 years Customer B 12.1 % 6.0 % 17.5 % 19 years Customer C 13.7 % 37.3 % 0 % 2 years Customer D 6.6 % 4.2 % 11.6 % 13 years 6 Customers A and D are resellers. The sales from reseller customers represent the aggregation of many purchase orders each of these customers placed with us throughout the year. Our reseller customers place an order with us when their customer orders our product from them. This cycle recurs numerous times throughout any given year. We work closely and frequently with our larger customers to ensure that they are receiving the value proposition and service from us they require to continue doing business with us. We would categorize our relationship with these customers as excellent and do not believe that there is a risk to any of these relationships over the next year. Customer C, being a contract with a specified ending date with no minimum order requirement in any given year, is not likely to experience the duration with us as our other major customers have, although the possibility exists that a new contract will be created to replace the old one when it expires. We believe that the risk of losing any one of these customers is small, and we are actively, and successfully, soliciting larger customers to diversify our current customer concentration. While we believe the risk of losing any one of these major customers over the next year is small, the loss of any two of these customers would pose a significant risk to the financial health of the Company. Seasonality of Business Our business is subjected to strong seasonal patterns during any given year, with our busiest period coinciding with summer learning and the planning leading up to providing summer programs (January through July). The period between Thanksgiving and the New Year is our slowest time, coinciding with the holiday season, as most schools observe the holidays with significant time off during this period. Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, including Duration We do not have any designs or equipment which are patented, registered trademarked, or licensed. Research and Development Costs During the Last Two Fiscal Years We currently expense our costs under a general operating expense category instead of capitalizing any research and development expenses. Employees As of March 31, 2024, we had 22 full-time employees. Impact of the Covid-19 Pandemic The pandemic affected our end markets considerably for a period of time when lockdown orders were enacted at schools and after-school programs. We sell to educational program providers, and our products are designed to be used in-person with group collaboration encouraged. School closures and a movement to remote learning during much of calendar year 2020 significantly and negatively impacted our revenue. Our revenue for fiscal year 2021 (ending March 31, 2021) declined 57.7% from our revenue for fiscal year 2020. For fiscal year 2022, the impact from the pandemic was negligible, as most K-12 learning institutions and after-school programs resumed in-person learning and services. We reported record revenue for fiscal years 2023 and 2024, indicating that the any lingering effects of the pandemic are insignificant. Our supply chain has experienced and continues to experience moderate delays due to the pandemic’s various effects on our vendors. Our vendors are located in China, Europe, South Korea, and the U.S., with each region experiencing the cycles of the pandemic at different times and reacting differently to it. These conditions have caused some delays in us receiving our raw materials from vendors. Port congestion arises from time to time, elevating transportation costs due to increased storage fees at the port, and further adding to delays in us receiving materials. In situations when these delays in receiving our materials risk interrupting our customers’ programs, we have often accommodated these customers, at the Company’s expense, with compensation in the form of free shipping to the customer, express shipping to the customer, express shipping of materials from our vendor to us, product substitutions with the customer, or additional materials given to the customer. We believe that these supply chain issues are manageable and temporary, but they will continue to negatively impact our profit margin until fully resolved. 7 General supply shortages of semiconductors, attributed to the pandemic, have elevated the cost of the flight controller component of our proprietary drone from $14.50 per unit to $50.00 per unit. Given the global nature of this shortage, we will procure only what is needed and wait to buy in bulk when supply returns to normal. We have solicited additional vendors who supply drone materials to diversify our supply chain. Recently, prices have begun to moderate. During the pandemic when our markets were significantly impaired by mandated lockdowns, we developed a STEM activity book, titled STEAMventures, which could be used in a distance-learning environment. We also modified two of our enrichment programs to be used at the individual level instead of at the group level, to accommodate areas where in-person learning was not possible. Through these developments, we believe that we have a better suite of offerings for distance-learning environments, should that environment arise again. On April 14, 2020, the Company received its first Paycheck Protection Program (“PPP”) loan in the amount of $193,375. This amount was subsequently forgiven in December of 2020. On February 2, 2021, the Company received its second PPP loan in the amount of $221,050. This amount was subsequently forgiven in September of 2021. The Company qualified for the Employee Retention Tax Credit (ERTC) for 2020 and the first three calendar quarters of 2021. The Company has filed an amended IRS Form 941 quarterly federal tax return for the April through June 2020 period to claim this credit as it was made retroactive at the end of 2020. We have also filed our quarterly Forms 941 claiming this credit. The amounts of the credits are summarized below: For period ERTC Amount Claimed April 1, 2021 – March 31, 2022 $ 198,995 April 1, 2022 - March 31, 2023 $ 94,860 Growth Plan Our primary focus is to continue penetrating the U.S. market with our current product line as we feel the market is large relative to our current market share and receptive to our value proposition of high-quality, easily implemented, hands-on STEM programs. We are actively pursuing larger customers who can implement our programs at multiple sites, recognizing that some unique product development may be required for these sales. We intend to develop new products and to enhance our current product line based on market feedback we receive, both solicited and unsolicited, and based on developments within our market. We intend to further develop and enhance our educational drone product line, and we are prepared to compete intensely in this product category, as we believe that 1), our curriculum offers us a competitive advantage in this space, and 2), the educational drone market is nascent and expected to continue to grow significantly. The Company reported record revenue and net income for fiscal year 2024, after a record fiscal year 2023, and our outlook is for continued profitability in our fiscal year 2025. The Company’s recent success, coupled with the Company’s established history of significant aggregate profitability for the past six years, accomplished under the supervision of different Management than the team that oversaw the period prior to fiscal year 2019, compelled Management, in consultation with Company tax advisors and auditors, to recognize the remainder of the tax-loss carry-forward asset on the Company’s fiscal year 2024 financial statements. In fiscal year 2023, the Company recognized $1,011,466 of the tax-loss carry-forward asset. In fiscal year 2024, the Company recognized the remaining $1,529,793 of the total tax-loss carry-forward asset, which at March 31, 2024, was $2,541,259. For the fiscal year ended March 31, 2023, the Company reported net income of $2,776,176, which includes the recognition of the tax-deferred asset. For the fiscal year ended March 31, 2024, the Company reported net income of $4,441,188, which includes the recognition of the remainder of the tax-loss carry-forward asset not recognized in fiscal year 2023. Regulation and Environmental Compliance Presently, none of our products are in highly regulated industries. Need for any Governmental Approval of Principal Products or Services No products presently being manufactured or sold by us are subject to prior governmental approvals. Notwithstanding the forgoing, the educational drone market is relatively new and undergoing significant regulatory evolution. We stay current on these regulatory developments and help our customers understand and comply with new regulations. 8 Effect of Existing or Probable Governmental Regulations on the Business Our Form 10 Registration Statement became effective 60 days after filing with the Commission (December 4, 2023, by reason of the 60 th day being a Saturday), at which point our securities became registered pursuant to Section 12(g) of the Exchange Act. Issuers with securities registered under Section 12(g) are subject to numerous regulatory requirements under the Exchange Act. For example, we will be subject to the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act creates a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members appointment, compensation and oversight of the work of public companies’ auditors; prohibits certain insider trading during pension fund blackout periods; and establishes a federal crime of securities fraud, among other provisions. Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act to comply with the rules and regulations of the Commission regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to stockholders of our Company at a special or annual meeting thereof or pursuant to a written consent will require that we provide our stockholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the Commission at least 10 days prior to the date that definitive copies of this information are forwarded to our stockholders. With the effectiveness of our Form 10 Registration Statement, we are also be required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the Commission on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; changes in executive officers and directors; and bankruptcy) in a Current Report on Form 8-K. The Company currently does not hold any intellectual property rights. While we use reasonable efforts to protect our trade and business secrets, we cannot assure that our employees, consultants, contractors, or advisors will not, unintentionally or willfully, disclose our trade secrets to competitors or other third parties. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, the Company’s competitors may independently develop equivalent knowledge, methods, and know-how. If we are unable to defend our trade secrets from others use, or if our competitors develop equivalent knowledge, it could have a material adverse effect on our business. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenue. Existing patent, copyright, trademark, and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, we may not be able to protect our proprietary rights against unauthorized third-party use. Enforcing a claim that a third party illegally obtained and is using the Company’s trade secrets could be expensive and time-consuming, and the outcome of such a claim is unpredictable. Litigation may be necessary in the future to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of resources and could materially adversely affect our future operating results. Item 1A. Risk Factors As a smaller reporting company, we are not required to respond to this Item.